IBM earnings growth expected to be driven by services

SAN FRANCISCO (MarketWatch) -- IBM Corp. is slated to give its third-quarter earnings report on Oct. 15, with earnings expected to rise and sales likely to show a slight decline from a year ago as services are likely to be one of the key yardsticks by which Big Blue's business is measured.

Analysts surveyed by Thomson Reuters estimate IBM
IBM, +0.70%
will earn $2.38 a share on $23.36 billion in sales for the quarter that ended in September. During the same period a year ago, the company earned $2.8 billion, or $2.04 a share, on revenue of $25.3 billion.

In March, IBM lowered its earnings from 2008 and 2007 due to a Financial Accouting Standards Board rule that required companies that provide dividend equivalents for restricted stock to include those shares in their share count. This move reduced IBM's third-quarter earnings a year ago by a penny a share.

Shares of IBM have risen 45% since the first of the year. The Nasdaq is up 35% over the same period.

Bryan Keane, technology analyst at Alpine Mutual Funds, said it should be no surprise that what IBM says about its services signings and revenue will get a lot of attention with the company's earnings report.

"The current quarter [report] should be fine," Keane said. "We should also see a positive impact from currency conversions and anything they say about the outlook will be notable."

Keane said it is likely IBM will not make any changes to its previously announced forecast for 2009 earnings of at least $9.70 a share.

What is unlikely, however, is that IBM will have any comment about a Department of Justice investigation into claims that the company illegally monopolized the mainframe computer market by keeping competitors from being able to license or develop software for its mainframes. See full story.

Bank of America/Merrill Lynch analyst Kevin Christiano said that there are "few negative catalysts on the horizon" for IBM, and said the company led the way for large computer hardware makers to expand into the services market.

However, Christiano initiated his coverage of IBM on Oct. 7 with an underweight rating on the company's stock. Christiano said his rating was based on "rich valuations" IBM's shares, which have risen 46% this year.

"While we believe valuations reflect investor flight to quality, we do not see any further upside to [current stock] levels," Christiano wrote in a research note.

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